Samsung succession in disarray as Jay Y. Lee criminal case advances

South Korean prosecutors request the arrest of Samsung head Jay Y Lee for charges of bribery linked to the corruption scandal engulfing President Park Geun Hye on Monday. VIDEO: REUTERS

SEOUL (BLOOMBERG) - The long-orchestrated plan to cement Mr Jay Y. Lee's position atop Samsung Group may put him in jail instead, raising questions about who would step in to run South Korea's biggest conglomerate in the aftermath.

Prosecutors are seeking Mr Lee's arrest on allegations including bribery and embezzlement, which if proven could prompt him to relinquish duties at the family business. Potential replacements include executives running key divisions of the dominant electronics business, as well as a sister - hotel executive Lee Boo Jin. While a long shot, her anointment would mark a seismic shift in the way the nation's patriarchal empires are run.

After spending years following his father's footsteps to the chairman's seat of Samsung Group, Mr Lee is trying now to avoid the missteps that triggered his father's two criminal convictions. Even if the accusations against him involving South Korea's President are proven in court, it's still possible Mr Lee could return to the company later or even call the shots from behind bars, just as executives from Hyundai Motor and SK Group have done.

"Chaebol executives have a history of managing from the jail, whether it be via lawyers or secretaries visiting them," said Professor Lee Kyung Mook at Seoul National University's Graduate School of Business.

Samsung declined to comment when asked about a potential leadership vacuum. A court hearing is scheduled for Wednesday (Jan 18) to determine whether to approve the prosecutor's request for an arrest warrant. Whether the warrant is granted or not, prosecutors would continue their probe with a possible indictment coming later.

Mr Lee's potential arrest in the scandal surrounding President Park Geun Hye is another calamity for the vice-chairman of Samsung Electronics, the largest maker of mobile devices. Last year, the company pulled its Galaxy Note 7 smartphone off the shelves because some devices burst into flames. The debacle cost Samsung an estimated US$6 billion (S$8.6 billion) and a competitive advantage before Apple released its iPhone 7 models.

Mr Lee, 48, has had trouble matching the success of his father Lee Kun Hee, who transformed Samsung Electronics from a copycat appliance maker into a global powerhouse in TVs, smartphones and memory chips. The elder Lee, South Korea's richest man, suffered a crippling heart attack in May 2014, and Samsung shares fell that year and the next before recovering in 2016.

"It's a perilous practice that a person can take over a company just because he or she was born to a successful father," opposition lawmaker Park Yong Jin said. "The biggest problem with our economy is that people with unproven skills run its biggest companies."

Mr Lee does not play the role of day-to-day manager, depending rather on co-CEOs and other top managers to handle those responsibilities. But employees and shareholders depend on him to provide strategic guidance when it comes to decisions like the next big bets in technology or potential acquisitions.

After the elder Lee's collapse, executives including JK Shin, who is in charge of the smartphone division, handled daily operations for Samsung Electronics.

The son became de facto leader of the group, which then embarked on an intricate reorganisation to solidify his control. Prosecutors want to know if that effort involved making payments to a presidential confidante in exchange for government support.

If Mr Lee is imprisoned, he could be replaced by Samsung Electronics' co-chief executive officer Kwon Oh Hyun, a 64-year-old who leads the semiconductor and display businesses. The successes of those two divisions helped propel Samsung to its best operating profit in three years during the quarter ended Dec 31.

Another candidate is Mr Yoon Boo Keun, who heads the consumer-electronics unit encompassing TVs and appliances.

"He's part of the trio with Lee and Kwon that has run Samsung Electronics," said Mr Park Ju Gun, president of Seoul-based corporate watchdog CEOSCORE. "Samsung could be run as if that trio were still intact."

It also would be "natural" for Mr Lee Kun Hee's eldest daughter to be considered, said Mr Chung Sun Sup, who runs corporate researcher Chaebul.com.

Ms Lee Boo Jin, 46, is CEO of the luxury Hotel Shilla Co chain, which is on track to post revenue growth for a sixth straight year, according to data compiled by Bloomberg. She owns 5.5 per cent of Samsung C&T, one of the biggest shareholders in Samsung Electronics.

"Some speculate she could practically take over, but being a large shareholder doesn't mean she could run a massive company like Samsung Electronics," Mr Chung said. "Realistically speaking, Kwon may be the one."

A daughter taking over Samsung would break with tradition in South Korea, where sons succeed fathers at the chaebol that dominate the economy. Still, Samsung has been a trailblazer in doing away with old business practices and hiring women aggressively.

"Lee's sister may briefly take the reins, but there's little chance she'd take over permanently given she has fewer shares in the firm than her brother," the professor said.

The youngest surviving daughter, Ms Lee Seo Hyun, is an executive at Samsung C&T.

In the meantime, Mr Jay Y. Lee may miss the window of opportunity to succeed his father as Parliament moves to make it harder for Samsung to use its own shares to help him consolidate control, said CEO Heo Pil Seok at Midas International Asset Management in Seoul. That could make the stock more volatile.

Opposition lawmaker Park submitted a Bill nicknamed the "Jay Y. Lee Law" to prevent financial firms from supporting the types of internal mergers orchestrated to help Mr Lee boost control.

"The corporate governance at Samsung could remain awkward for an extended period of time, and that would increase uncertainties," CEO Heo said.

The elder Lee faced his own scandals - a 1996 conviction for bribing a former president and a 2008 conviction for embezzlement and tax evasion. Both times, he was pardoned.

That history may work against his children, and Mr Jay Y. Lee acknowledged publicly that someone else may take over the collection of about 60 divisions whose combined revenues equal about one-fifth of South Korea's gross domestic product.

During a parliamentary hearing before President Park's impeachment, he was asked whether he would surrender management control of Samsung.

"I will hand it over if there is someone better than me," he said. "I will hand it over at any time."